Icahn chastises Mentor Graphics over debt sale proposal

One day after his $1.9 billion offer for Mentor Graphics Corp. was rejected, billionaire activist investor Carl Icahn lashed out Tuesday against the company’s plan to sell up to $253 million in convertible debt, saying it will make an acquisition more difficult.

“The continual dilution of the Mentor Graphics common stockholder appears to be business as usual for the company,” Icahn wrote in a letter to shareholders filed with the federal Securities & Exchange Commission.

Wilsonville-based Mentor (NASDAQ: MENT), a maker of software and tools used by chip designers, on Monday rejected Icahn’s $17-per-share bid, saying it undervalued the company.

Mentor also dismissed the notion of selling the company at all, particularly to one of its competitors, in part because it poses regulatory risks.

Then on Tuesday — in what Icahn termed “in the dark of the night” — Mentor announced a plan to sell $220 million of its debt through a private placement, with an option for buyers to acquire up to $33 million more.

In a news release, Mentor said it will use the proceeds to repurchase up to $25 million in outstanding common stock, repay what remains under an $18.5 million loan due in 2013 and, along with its cash on hand, to retire the outstanding principal and interest on its 6.25 percent convertible subordinated debt due 2026.

Anything remaining from the sale will be used for general corporate uses, the company said.

Mentor officials declined to comment on Icahn's statements.

Icahn contends that by selling securities that can be converted to stock, Mentor will dilute current shareholders, making it more difficult for a potential buyer to acquire the company.

“This news should outrage our fellow shareholders as it does us,” Icahn wrote.

He contends Mentor should have used its earnings or borrow money without stock conversion features to pay down its debt, and then used his argument as a platform to campaign for three seats on Mentor’s board up for grabs at the company’s May 12th annual meeting.

“This is an example of why the composition of the board cries out for new blood — members who consider what is best for our fellow shareholders and are not satisfied with the status quo,” Icahn wrote.

A note from analysts with J.P. Morgan, however, said Mentor’s plan is accretive and not dilutive.

The company is essentially refinancing debt with more favorable terms, according to J.P. Morgan, spending an estimated $210 million to retire $196.5 million of existing debt.

Mentor’s proposal could increase its annual profit by between 3 and 5 cents per share, according to J.P. Morgan estimates.

Nonetheless, an outraged Icahn rebuked Mentor in his strongest language yet, for the first time publicly leveling critcism at CEO Walden Rhines.

“For the last seventeen years, the company’s share price has been in the doldrums. Walden Rhines has pocketed seventeen years of salaries and bonuses and the long-standing members of the Board of Directors have been unchallenged and keep re-nominating themselves and getting elected,” Icahn wrote. “It looks as though they are trying to ensure that they can keep the country club going for the next seventeen years while the shareholders may face continuing dilutive issuances by the company.”

He ended his note by encouraging Mentor’s board to drop the debt sale proposal, and saying that it’s time for shareholders to be given the choice of selling the company.

Mentor shares closed Tuesday down more than 3.5 percent to $14.67. The company's shares have traded between $7.81 and $16.56 in the past 52 weeks.